Are Miners on a Roll Just Now?

At the beginning of the year Brazil warned that the world is on course for
a full-blown "trade war" as it stepped up its rhetoric against exchange rate
manipulation. Also known as competitive devaluation, a currency war is a situation
where countries compete against each other to achieve relatively low exchange
rates for their own currency. Currency issues have certainly dominated economic
news so far this year. Just this summer Switzerland lowered the value of the
Swiss franc, boosting gold's role as a safe haven. Currency tensions between
the U.S. and China have not eased over the course of the year. Legislation
designed to press China to let its currency rise in value passed the Senate
just this week. Americans say that China's yuan policy already amounts to a
trade war that has decimated the U.S. industrial base with artificially cheap
products.

Emerging market economies continue to grow, but that poses risks of inflation.
China remains the 800-pound gorilla, with economists wondering how it will
manage its rapid growth. That has mostly been the case this year. Fast growth
has fired up the country's economic engines, but it has also led to stubbornly
high inflation. In March of this year, the Chinese government said that food
prices rose by 11.7 per cent. Gold is considered a hedge against inflation
and we have seen a rapid rise in gold buying among the Chinese middle class.

This year we saw social unrest, demonstrations and riots. Look at the so-called "Arab
Spring," the protests in Tel Aviv, Spain and Greece and the recent "Occupy
Wall Street" movement in the U.S. which is spreading across the country. When
there is unrest, people tend to turn to gold to protect their wealth.

Sovereign debt across the West is past danger level and it won't take much
for people to lose confidence in their currencies and start trading them for
anything of value (Gold? Silver? Platinum?). Hyperinflation has a single cause:
it occurs when a government cannot borrow money because its debt has risen
so much that investors believe they will never be paid back with close to the
same purchasing power. As a consequence of this flight of confidence, such
a government is forced to print money to meet its obligations. This further
undermines the value of its currency, often culminating in a frenzied collapse.

So far this year we have not seen hyperinflation but plenty of lack of confidence
in sovereign debt.

To see if at present this translates into increased confidence in precious
metals mining stocks, let's turn to the technical part starting with the analysis
of the S&P 500 chart (charts courtesy by http://stockcharts.com.)

In the medium-term S&P 500 Index chart, we see a strong analogy to trading
patterns from 2010. There is a possibility that we may see another move lower
before the bigger rally begins. This would be similar to what was seen in August
of last year and may be seen once again if history repeats itself.

This would be in tune with 2008 as well when a sharp bounce in interest rates
was seen. Back then, the bottom in interest rates followed the final bottom
for precious metals and preceded the general stock market bottom.

In the XBD Broker Dealer Index chart, we see a confirmation of the move above
80 and above the Fibonacci retracement level as well. Of course, this chart
is a useful tool for identifying upcoming general stock market moves. Here,
with the previous breakdown invalidated and the bottom likely being in, the
implications are clearly bullish.

In the Correlation Matrix, the mining stocks short-term relationship with
the general stock market remains both positive and strong. This means that
higher prices in the stock market would most likely translate into higher prices
in the mining stocks sector. However, considering the cloudy short-term situation
for the general stock market this is far from sure.

Having considered the likely impact of the general stock market on miners,
let's move on to the analysis of mining stocks themselves.

Only one thing has changed in this week's very long-term XAU gold and silver
miner's index chart. Namely, the breakdown below the rising trend channel has
been invalidated and the index level is now clearly above the lower border.
The breakdown below the highs of 2008 has not yet been invalidated. If and
when this is seen, a very bullish situation will be at hand.

In this week's long-term HUI Index chart, we have seen a small pause in the
rally. The question now is whether the next price move will be similar to the
July and February upswings or the downturn in June. The current decline has
been huge and should be considered for the April to June period rather than
just April to May. The analogy best suited for the weeks ahead appears to be
July and February as opposed to a comparison with June. Therefore, the decline
is likely to be minor.

In the short-term GDX ETF chart, we have seen low volume levels coupled with
a pause in the rally. This took place after the rising resistance level was
reached and is therefore not a surprise. It is likely that this is not the
final top for the current rally.

The mining stocks have been on an extremely scary and volatile ride of
late but their recent price action has not been a complete surprise. Although
we would not say this was a most likely option, it was one which we knew
was possible. Now that the support level has been reached, the odds of a
subsequent rally are likely increased once the ratio breaks out above the
declining trend channel and the move is verified. The situation therefore
appears to be quite bullish at this time.

For the time being, we need to restate our point of view that a move up from
here is still a quite good possibility.

Summing up, the situation for the general stock market appears to be
bullish for the medium term but the short-term situation is quite cloudy at
this time. The situation in mining stocks appears favorable based on the underlying
metals and the self-similar pattern in the HUI Index chart. The influence of
the general stock market should also eventually be positive although the short-term
picture is presently unclear.

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
Opinions and analyses were based on data available to authors of respective
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